I can openly share with you that I failed all my previous ventures for this simple reason.
I did not understand RISK (or anything related to it, actually).
But why should you understand this concept?
Years ago, I was just a young engineer with no business knowledge, no family to care for, just a few product ideas, and some expensive dreams.
I want to create something meaningful, I used to say to myself.
For me, something meaningful was defined (and still is today) as creating extraordinary tech products that impact other people's lives.
I failed three SaaS products on the road in less than two years, and I was tired of failing, so after reflecting for several months, I decided to try a different approach.
One of my significant mistakes (I thought) was not having a specific business domain to focus on and iterate infinitely until enough wisdom and experience helped me leverage a great product.
I immediately changed my goals and targets and my fourth product-building strategy, this time in the finance industry.
I knew a friend who was day trading then, and I asked him for some book recommendations.
Then, I also started trading, and I got hooked.
I set aside SaaS product development, innovations, and even engineering for the next three years.
I traded in the stock market almost daily, read many books, and learned all I could about the financial market.
I even went to New York for the first time to get this cool picture of the bull of Wall Street.
Three years back, my account was 32.6% up (I'm proud of that number since I did not lose the 27k I started trading with).
Everything changed when I found Rober Carver's books, and I stopped trading and continued reading the financial literacy that was exposing me to so many fundamental concepts that I could not stop reading it for several months straight.
Concepts like cost opportunity, risk, tail distributions, volatility, standard deviations, skewness, and fractality changed my mind, life, and approach to risk-taking.
Looking back now, I think I was lucky to find this literacy because it widened my sight as an entrepreneur.
So today, I see myself as a tech founder who is getting better at gambling with tech products.
Hopefully, this article will show why I think is imperative that you should be as good as a gambler as a founder.
The unexpected truth was that I learned more about business, innovation, and entrepreneurship while trading and studying financial markets than when building my own SaaS products.
Since then, I have started to widen the things I index and learn horizontally (Horizontal learning is everything you learn that is not within your domain expertise; vertical learning is everything within your domain expertise).
These fundamental concepts that I got from a different field forever impacted my life.
So go there and read from many places and many areas of knowledge. Who knows the hidden knowledge, ideas, or concepts that can change your life forever?
For me, this hidden knowledge gem concept made this journey worth hundreds of dollars: understanding risk, its importance, and its existence.
So, in this article, I will share with you the biggest fourth risk-related lesson I learned in my trading venture so you can apply it in your founder journey.
1. Lack of diversification will kill you.
If you continue to do business for long enough, you will notice how dangerous the business world is.
If you don’t minimize the probability of losing everything you have, you are more likely to go bankrupt as you make more business transactions (or launch more often).
And believe me, it is better to miss hundreds of bets than go bankrupt once.
In this business, you will likely fail again, even after winning. As you win more often, some cognitive bias kicks in, and overconfidence starts dancing in your ideas and brain, making you believe you are invincible.
Financial literacy shows the importance of diversification and investment returns and its impact on portfolio construction.
You can put all your eggs in one basket and watch it closely or distribute them among different baskets.
The only problem with the first approach is that most people use it without being aware of the probability of an inevitable significant loss.
So, diversify and give yourself another chance to fight another day.
2. Predictable risk vs. Unpredictable risk.
“There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we know we don't know… But there are also unknown unknowns - the things we don't know we don't know.”
Donald Rumsfeld
As a founder, you must understand the distinction between predictable and unpredictable risks (a concept popularized by former US Secretary of Defense Donald Rumsfeld).
Predictable risks (known knowns) are easy to identify and sometimes quantify, such as market competition, talent acquisition, project delays, cost overruns, operation cost, capital loss, or even human retention.
The more experienced you are in your domain, the better your decision-making process and strategies to mitigate these risks.
This is why fast iteration and achieving a high rate of improvement in each are imperative for founders.
It makes managing risk easy.
One caveat: the more knowledge you gain, the better you should manage these risks, but only if you are also effectively handling your cognitive bias issues (but that’s another article).
Conversely, unpredictable risks (or “black swan events,” as Nassim Taleb popularized them) are difficult or impossible to foresee.
The sudden shifts in consumer behavior, a new disruptive technology launched by another company, new unforeseen legal regulations, a war, a pandemic, a natural disaster, or any other specific global events of the same kind.
This type of risk that you can’t quantify, and many others that we can even talk about, can disrupt your life, product, and business.
The hard part of unpredictable risks is that they can't be eliminated, you can’t prepare a defined strategy, and most people forget their existence.
History shows that society forgets fast.
So, use scenario planning strategies (I like to name it schizophrenic planning) to minimize its impact.
So again, never put all your eggs in one basket (if you do it, though, as I said before, watch them closely and tell your wife all swans are white).
3. Understand Probability Distributions and Skewness.
I promise I will explain this as easily as I can.
As I stated in the previous lesson, knowledge and understanding your data with certainty will help you handle risk management effectively, but Why?
Because you can decrease the probability of being wrong.
Some statistical concepts (like standard deviation, confidence intervals, probability distribution, skewness, and Sharpe ratios) allow you to understand potential outcomes fully.
By analyzing your product data using these concepts, you can make informed decisions about resource allocation and investment strategies for your product development and change risk strategies accordingly.
For example:
A Gaussian normal distribution, often visualized as a bell curve, depicts a symmetrical spread of data points around a central value (mean). A normal distribution can approximate many real-world phenomena, like user engagement or product adoption.
This idea It will help you identify ranges of outcomes (success rates) or outlier data points (or opportunities)
However, not all distributions are symmetric.
So, here is where the Skewness concept starts dancing.
Skewness helps you understand the asymmetry of the data points you are looking at.
If we analyze a financial portfolio manager's profits and losses, we will see that they are most likely to be skewed (positively (right) or negatively (left)).
In most startup companies, for example, revenue distribution often exhibits a positive skew. This means that a larger proportion of startups experience lower-than-average revenue, while a minor number experience much higher income.
The main idea here (so we don’t go off-topic) is that you must change your risk strategies, risk allocation, and risk appetite depending on the type of distribution properties your data point (you, your products, and your companies) is showing.
In this article, I explained why a founder needs to be efficient when launching your products.
The problem is that you don’t know how to be efficient when you start, so this even gets harder for first-time founders.
Time, cost, and revenue are the only things you can measure right away (revenue starting at 0 since you began developing your idea); plotting the skewness of these data points will most likely follow a positive skew.
That’s why you feel you are losing every day (frequently loss) for hopefully some gain in the future (infrequent successful launch).
For example, buying insurance is a positive-skew strategy since you will experience frequent losses (paying out premia) with occasional significant gains (receiving payout).
I follow the same approach in my ventures and think you should, too.
4. Manage your Product as a Financial Portfolio Manager (a successful one)
Poker players understand the power of small bets.
If you keep track of small bets long enough, you will have enough data to understand your profitability ratios and change your risk accordingly (using the Kelly Criterion Formula).
As poker players, portfolio managers, or traders, founders should manage their risk strategies using these ideas and concepts.
You must be in the game (as a founder) so that those infrequent gains can be capitalized and paid for all the small product losses you had before.
The best way to guarantee that is by handling your product decision-making process when launching, building, and growing like an intelligent bet poker player, minimizing the impact on the variables you already can quantify.
For example, decreasing time and cost is imperative when launching new ideas.
It is most likely that almost all product launches will fail, but you only need one that pays for all the others and more.
Today, reaching the ultimate goal of being a founder for me (and I think you should, too) is having a profitable portfolio of products.
(That follows a negative skew profitability asymmetric distribution with infrequent small losses and frequent significant gains, and you can exit all of them before the probable specific considerable loss that will happen)